On income inequality

The OECD report this week that has found New Zealand to have one of the fastest growing income gaps in the entire OECD will come as no surprise.

Since the 1980s, successive governments have been complicit in a wealth transfer of massive proportions, as tax revenues collected by increasingly regressive means (eg the flattening of the income tax scales, the imposition of highly regressive consumption taxes) have been wasted in tax cuts that have disproportionately favoured the wealthy, while a major form of wealth accumulation (via capital gains) has been barely touched at all.

It is not exactly rocket science that when you do such things, you will get a society of unequal opportunity and wasted potential, marked by the usual array of criminal behaviours and poor health outcomes that follow in the wake of systematic income inequality. Such problems are particularly rife in the United States, where Treasury and the Act Party continue to draw their inspiration.

The latest piece of highway robbery – a spending cap on government – has just been delivered via the Act Party coalition agreement. Well, at least we now see clearly that the Epsom tea party was less about keeping National in power, and more to do with sneaking an agenda of failed 20-year-old American extremist policies into Parliament, without any democratic mandate at all.

In practice, the spending cap will prevent government from responding to any social need in excess of the inflation rate, population growth or natural disasters. Presumably, it will not stop one departmental budget being raided to fund another – and for that reason the Maori Party will probably go along with an overall spending cap so long as they get the money for their programmes, whatever the cost to anyone else.

Some years ago, when Rodney Hide was using Colorado explicitly to justify his spending cap plans I wrote about the impacts (“Rodney Hide’s Latest Plan For Gutting Local Democracy”) in this article here and also here (“Rodney Hide’s Wet. Hot Colorado Dream”).

Thankfully, while the details of the Key government’s spending cap have yet to be revealed, they will not contain the referendum mechanism responsible for some of the most pernicious effects in Colorado. However, the core principle – that the public has no right to expect the taxes they pay will be spent on social services they use, but should be paid out instead in tax cuts to the rich – has been retained.

Talking of taxes, the OECD report recommends – as one of its three restorative principles – that the taxes on the wealthy in New Zealand should be increased. Fat chance. Over the past 25 years, New Zealand has chosen to increase taxes on the poor, and lighten the tax burden on the wealthy, to no perceivable social or economic benefit. The explosion of economic entrepreneurial activity supposed to result from lowering taxes on the wealthy? Like the Tooth Fairy, that mythical bonanza remains missing in action.

Good timing: the evidence of just where New Zealand sits in relation to the rest of the world on tax matters can be found in a little book that was officially launched last Monday.

The New New Zealand Tax System, by Rob Salmond is that rarest of beasts – a cheap, brief (129 pages, counting footnotes) well-researched and well-written account of just how New Zealand’s tax system compares to that of other countries. Wonder of wonders, Salmond’s tax analysis is also extremely easy for non-professionals to understand. It would be the ideal Christmas gift for the policy nerd in your life, and/or could be essential holiday reading for all of us.

The book contains particularly useful ammunition for those Christmas dinner arguments with that problematic father-in-law prone to bending your ear on just how heavily we are taxed in this country by Big Government.

If anything, the reverse is true. With research into income and consumption taxes to back it up, Salmond concludes ( p 121): “First, at very low income levels New Zealand charges more tax overall than each of the three most comparable countries [Australia, Canada and the United Kingdom] Second, at very high levels of income, none of the comparison countries levy lower taxes than New Zealand.” So, on the international comparisons, we tax the rich less, and we tax the poor more, than elsewhere. If you don’t believe me, get ahold of Salmond’s book.

Is the current government likely to do anything at all about this situation? No. National and the Act Party that it nurtures hydroponically in a glasshouse in Epsom have not had a new idea in 30 years. Why, as a nation of four million people, do we continue to look for inspiration to how market mechanisms operate in the United States, a country of 307 million people?

Why do we not look for inspiration to countries of similar size and social cohesiveness in Scandinavia? Finland, as the educational historian Diane Ravitch pointed out yesterday on RNZ, has one of the best performing, most egalitarian school systems in the world – and so, she asked, why doesn’t New Zealand look to it as a model? Instead we are, once again, looking to the United States and its charter schools experiment.

Unfortunately, Finland is no panacea to New Zealand problems with income inequality. In the very first article in which the term ‘Rogernomics’ ever appeared (headline : “Rogernomics in Finland” in the Listener in the mid 1980s) Douglas regaled me with how Finland was his inspiration, and by 2008, the fruits of such policies were having much the same outcomes. By 2008, what were the two countries in the OECD with the fastest growing rates of income inequality? Finland and New Zealand:

Statistics over the past two decades show that the growth in income disparities was highest in New Zealand, with Finland coming in second. However, New Zealand’s income gap widened only in the period from 1985 to 1995, while the past decade no longer saw any significant growth in the country’s Gini-coefficient figures, the standard unit of measurement in this context. In spite of the rapid growth rate, Finland is still a country with low inequality of incomes, clearly below the average.

That finally, is what is so disturbing about this week’s OECD report, because it shows the Gini co-efficient figures for New Zealand are kicking on very strongly once again, putting us back in 1985-1995 territory. Currently, there are countries with historical legacies of income inequality that are higher on average than New Zealand’s, but we are currently on a headlong track to the bottom – and with only failed policies for guidance, as promoted by a Treasury and an Act Party that seem to have learned nothing since the glory days of the Chicago School.


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